Healthcare consolidation and valuation implications

I noted in a previous blog post that reform is driving a consolidation trend in the healthcare industry--particularly among hospitals and physicians--with the former looking in some cases to convert to so-called provider-based billing. This consolidation trend is also one of the leading causes of the cost spiral we see influencing health insurance premiums.

Here’s an example: There was a recent case in which the most common dermatopathology code (88305) was 140% greater (or 2.4 times) when billed by a hospital than when billed by a physician’s office. This occurred because the hospital facility fee is dramatically higher than the ‘technical component’ fee charged by the physician’s office. Since hospitals can get paid significantly more for exactly the same service, consolidation in a given healthcare market involving physicians and hospitals has significant general business valuation implications and valuation analysts often find themselves under pressure to consider these higher hospital payments in their valuation models.